Chinese Banks ‘Built on Quicksand’ With Bad Loans, Chanos Says

Chinese banks are “extremely
fragile” because the lenders don’t have enough capital to
offset bad loans, said Jim Chanos, president and founder of the
$6 billion hedge fund Kynikos Associates Ltd.

Chinese lenders are saddled with non-performing loans
accumulated in the late 1990s and early 2000s, Chanos, the short
seller who predicted the collapse of Enron Corp. in 2001, said
in an interview on Bloomberg Television yesterday. The banks are
failing to recognize the losses on the bad loans and have
carried out a lending binge since 2008, said Chanos.

“The Chinese banking system is built on quicksand and
that’s the one thing a lot of people don’t realize,” said
Chanos, who is shorting the shares of Agricultural Bank of
China. “Everybody seems to think it is a free and clear open
checkbook. It’s not. The banking system in China is extremely
fragile.”

The MSCI China Financials Index of bank stocks has declined
32 percent this year on concern the quality of loans to local
governments and the housing market will deteriorate as economic
growth slows. State-run Central Huijin Investment Ltd., an arm
of China’s sovereign wealth fund, said on Oct. 10 that it
started buying stock in the four biggest Chinese lenders after
their shares tumbled this year.

China spent 3.5 trillion yuan ($550 billion), equal to a
fifth of its 2005 gross domestic product, bailing out and
recapitalizing state-owned banks since 1998 as their lending to
unprofitable state-owned businesses turned sour, according to an
estimate by Moody’s Investors Service in 2007. Since September
2008, Chinese banks doled out $3.8 trillion in new loans to
offset the impact of the global financial crisis, according to
the International Monetary Fund.

Chanos said that he’ll keep his short positions until the
government recapitalizes the banking system again.

In short selling, investors sell borrowed shares in
anticipation that the securities will decline and they can buy
them back at a profit.